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Saturday, May 30, 2015

Planning for Tomorrow

When you’re a corporate employee – if you’re lucky – you
have a company-matched 401K and maybe even a fully funded pension plan. When
you’re self-employed, saving for retirement is all on you. And unless you want
to still be working when you’re old and gray, it’s a good idea to start saving
sooner rather than later. Granted, if you have the right type of business, then working past traditional retirement age may be something you choose to do. But a good retirement plan can mean the difference between working by choice or working from necessity.

The good news is, the government makes it easy – and tax
free – to build up your own personal retirement account.

401K or IRA

A 401K is a special
type of retirement fund set up and administered through an employer. Some
companies offer to match a percentage of every dollar you contribute, making
this a nice, pre-tax benefit.

IRAs, or Individual
Retirement Accounts, are set up with the help of a bank or financial planner,
and are also non-taxable. That means that if you’re paying 30% of your net
income to the IRS (not uncommon for self-employed folks) you can save 30 cents
on every dollar you contribute to an IRA.

There’s a limit to
how much you can invest in a retirement account. For individual 401Ks
(available only to self-employed persons with no employees), the maximum you
can stash away pre-tax is $17,000. For IRAs, it’s $5,000.

Before you start
stashing money away, though, remember that this tax savings does come with a
price: You can’t touch the money you invest until you’re 65, or you end up
paying not only the income tax, but penalties as well. In addition, you will have to pay income tax on that
money when you retire. There’s no escaping the tax man entirely, unfortunately.

A Sound Investment?

There’s another
benefit of a retirement savings account: the potential to earn substantial
interest rates. Because you have the flexibility to divide your IRA funds up
among various investments, you can potentially see returns as high as 10 or
12%. That’s a far cry from the 1% your savings account is offering.

Of course, there’s
no guarantee that any investment will earn money. Just talk to anyone who was
close to retirement age when the economy took a downturn in the early 2000s.
Many people saw their 401ks and IRAs dwindle away to nearly nothing, while they
stood helplessly by and watched.

But for saving on your income tax as a small
business owner, an IRA or individual 401K is ideal. They’re easy to set up and
have few costs involved, plus they give you the freedom to invest your money in
high-earning stocks or to choose safer bonds.We have been building our retirement savings for years. It is comforting to know that if we should ever want or need to stop working altogether, we will still be able to live quite comfortably. If you are unsure how to get started planning for your tomorrow, contact a trusted financial advisor for help.